I clearly remember as a college student thinking that pediatrics might be a good fit for me someday. I knew they were the least compensated physicians, but I also knew I was getting along just fine on something like $12,000 a year. I figured I would find a way to survive on 10x that.
Eventually, I got into medical school and the third year rotations, and I realized that sick kids made me sad, some parents could drive me crazy, and I wasn’t a fan of clinic of any kind. I found solace in the operating room, and that was that.
Still, the lesson that happiness and spending were poorly correlated stuck with me.
Today’s guest post comes from the couple behind Debt Ascent. They’re a team with two doctoral degrees — a dentist and Ph.D. engineer — who were straddled with $500,000 of student loan debt just five years ago.
They’ve come along way since then, as you’ll see in the second figure below. I want to thank them for sharing this inspiring story with us. Like me, they have found themselves with incomes that far outpace their desired level of spending, and their debt played no small part in that.
How $500k in Student Loan Debt Prepared Us for FIRE
If one considered our journey through student loan debt to be like a rim-to-rim hike through the Grand Canyon, February of 2014 was when we reached the river bottom of the canyon floor.
We had descended $521,000 in debt – almost exclusively student loans – with a simple plan to get back out:
Pay it back.
Now, before there’s any rush to judgment, I’ll tell you this was part of the plan. We knew we’d find ourselves hundreds of thousands of dollars in debt. It was expected that it would take years to pay back.
We never viewed this as some huge obstacle we had to overcome, even if it was a bit intimidating. Rather, we saw it as a worthwhile cost to change the trajectory of our future.
So please allow me the opportunity to explain how a pair of 20-somethings found themselves half a million dollars in debt and then used it to help them in their pursuit of financial independence.
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I married the love of my life in the summer of 2009 after we had just completed our Bachelor’s Degrees. To that point, we had taken out a modest amount of combined student loan debt.
She had been preparing for dental school while I had studied engineering. As an undergrad, I had avoided a science degree such as Chemistry or Physics. I wanted a strong chance for employment without an advanced degree and I thought engineering was a good bet. It probably was, but that doesn’t mean it was ever a guarantee.
I graduated toward the top of my class but had trouble finding an employer to even accept an application during my senior year in the midst of the Great Recession. Since my wife was already planning to attend dental school, I quickly decided my best option was to continue my education as well.
Once the decision was made, it seemed like it was meant to be. We liked that we would both be in similar environments and could relate to what each other was going through better than if one of us had moved into the workforce.
This brings us back to how we found ourselves in so much debt. As you may know, dental school is very expensive. It’s also very competitive to get into. We grew up in a state that doesn’t have a dental school, so any relatively inexpensive in-state option wasn’t available to my wife. Given that many (most?) of the state schools reserve a large portion of their enrollment for students from their state, that meant that private schools were likely the best option for her to get accepted.
In the end, she did have her choice between a few schools. The reality, though, was that the cost was going to be considerably more than what we had originally planned.
We decided it was worthwhile anyway. I applied and was accepted to the Ph.D. program in the engineering department at a nearby graduate school. I started graduate school and she started dental school a few days, and a few miles apart from one another.
Fast forward a few years and we eventually found ourselves with a few new degrees in hand, a child in tow (we had a baby our last year of school — on purpose), and half a million dollars in debt to show for our efforts.
Our descent into debt from our first student loans in the fall of 2005 to a maximum debt of $521,741 in February 2014.
Just Like We Planned It
This is the part of the story where one might expect we would start talking about how our student loans were a mistake. I won’t do that, because that’s not how I feel. Financing our education was how we were able to reach our career goals. We used student loans as a tool. One that has since helped us achieve an income that places us well into the top 5% of households in the U.S.
That last part is often left out when people are talking about the magnitude of their student loans. Some people seem to love to talk about how much student debt a broken system let them take on, but they often leave out what they got out of the transaction.
I’m not saying they don’t have valid concerns. I’m only trying to say we shouldn’t ignore that there are – potentially substantial – benefits to furthering your education, even if it comes at a significant up-front cost.
For us, taking out loans was a way to make a life-altering change to our personal capital. One that would result in a combined annual income on the order of many multiples of what we would have otherwise earned.
With that, I can’t in good faith pretend like the student loans we took on were a mistake. They weren’t. They were an investment. A great big expensive one, but an investment all the same.
In early 2014 we knew we were at an inflection point. We had recently moved so that I could start my career and she could continue hers.
When we ran the numbers, we quickly realized our cash flow would be sufficient to support our standard repayment on our student loans even after paying for rent, childcare, and all other living expenses.
No Need for Income-Driven Repayment
For us, that was reason enough for us to not consider any income-driven repayment options.
We determined that if we wanted to pay off just north of $500k in loans in 10 years, even if the loans averaged 6%, that came to a monthly payment of $5,500.
Now, don’t get me wrong, that’s a ton of money each month to lose toward paying down debt for ten years. However, when we looked at two people starting off their careers each earning low six figures, how could we reasonably say that we couldn’t make that work?
How could I tell my parents that we couldn’t live – or thrive – on more income than they’ve ever enjoyed in their life even after making our debt payment?
So, the simplest answer regarding income-driven repayment strategies is that because we didn’t need them, we didn’t consider them.
We had always held the view these programs were intended for those in need. And how could we possibly claim to be in need? We had willingly signed up for the loans. We now had the careers we wanted and the salaries we anticipated.
That was good enough for us.
Refinance and Attack
So instead, we decided our best option was to refinance our debt. It took some time, but we were eventually able to cut our interest rates more than in half by refinancing almost all of our student loans.
That was quite the relief to start saving interest on hundreds of thousands of dollars in debt. In the beginning, it literally resulted in a decrease in our monthly interest payment by more than $1,000. This was another big advantage of avoiding income-driven repayment options. We were no longer tied to the high rates that were set when we originally took out the loans. We were free to shop around for the best deal.
And that we did.
[PoF: With interest rates dropping, now is a great time to consider refinancing your loans. Even if you’ve refinanced before, you may very well be able to refinance again at a lower rate, and if you go with a different company, earn another cash back bonus, as well.]
A Change in Plans
Once we had committed to repaying our debt on our terms, we discussed how that fit our long-term financial goals. Were we after something more than just paying off our debt?
While understanding the importance of eliminating our student loans, we came to realize our true goal was to build wealth. We were after Financial Independence. With this goal in mind, we started to think about how we could take our starting position and optimize the path to get there.
Without question, it was our debt that forced us to take our financial education seriously. It pushed us into learning more about personal finance.
It led us to acquire the focused attention needed to manage both our debt as well as the money that was left over.
With that attention and education came exposure to new concepts and possibilities.
How our debt prepared us for FIRE
Somewhere along the way, that led us to personal finance writers talking about not only financial independence but also the potential for early retirement.
Avoiding Lifestyle Inflation
We quickly realized there was no reason we couldn’t aspire for this as well. In a way, it almost served as an advantage that our debt prevented us from inflating our lifestyle to match our income. It was going to take on the order of years to repay our debt. We had no choice but to live on considerably less than we were bringing home on a monthly basis.
We started thinking ahead to when the debt would be gone. When that time eventually came, we would find ourselves with a large cash flow surplus that we would have learned to not depend on. We could then use this surplus to invest in our future and minimize the time needed to reach financial independence.
From Another Perspective
It’s difficult to say whether we would have had this mindset if we hadn’t started from the vantage point that we did. It’s entirely possible that a young couple with a pair of high incomes starting at or near the canyon rim would have chosen a different, more costly lifestyle than those staring up at them from the bottom.
That’s why I think the debt is a big reason why we’re now on a path toward financial independence and early retirement. Not only did it force our hand to take our financial education seriously, but it also dampened our ability to inflate our lifestyle from the outset.
The Pursuit of Financial Independence
So the big question was how this fits in with our main overarching goal of pursuing financial independence. Since the end goal was never just to reach a liability balance of zero, we have never made eliminating our debt a singular focus.
That, in turn, has affected how we have handled our finances.
Since we started our careers, we’ve made it a point to first prioritize fully funding our employer-sponsored retirement accounts. This is before paying any extra toward our student loan debt. Thankfully, our combined income has afforded us the ability to do this. I don’t take the significance of this for granted.
We knew there are finite opportunities to invest pre-tax dollars in our retirement accounts. We believed taking advantage of these tax-advantaged accounts was better for our long-term goal of pursuing FI. Even if that meant extending the timeline to pay off our debt.
Focusing on How We Want to Live After Debt
We took this time to really consider how to optimize how we wanted our life after debt to look. This was beyond our focus on reducing our debt and continuing to build our assets.
We have come to see the benefit in keeping some of the large expenses reigned in. We now realize that the big house and fancy cars are not what we find to be important. At the same time, rather than keeping all costs as low as possible, we’ve tried our best to find balance. The desired outcome is to live our lives without wants or needs while still making substantive financial progress.
The hope is that we continue to sustain this once our debt has been eliminated.
Progress to Date
A little more than five years have passed since that February day when we picked ourselves up off the canyon floor. In that time we’ve stuck with our plan and have made consistent progress toward our goal.
Since February 2014, we’ve now paid off roughly $400,000 of our student loan debt. We have also increased our assets by roughly the same amount. Our net worth has improved by more than $800,000 since we began our climb out of debt. In early 2014 our net worth stood at -$470k and has since improved to +$335k as of April 2019.
Our net worth tracked from Fall 2005 to April 2019.
In addition, we’ve had the opportunity to save up enough for a down payment to purchase a home. We’ve also increased the size of our family to a total of four along the way.
We have a ways to go to reach our end goals. However, to say we’re anything short of happy with how things have progressed so far would be a lie.
If you are facing a mountain of student loan debt yourself, I would encourage you to think about your path. Our aim is to provide an example of how one’s starting position doesn’t have to dictate or limit their success.
My one hope would be that you do not get too hung up on where you are. Instead, focus on where you’re headed. Think about where you’ve been. When you’re discouraged about where you are, look at where you’re trending. Your trajectory is so much more important than a static look at where you are now.
Even when progress seems slow, keep pushing forward. The climb out of debt isn’t easy, but it gets better with each passing payment. The forces working against you slowly become less and less.
The climb gets easier.
[PoF: Congratulations on your amazing progress, and thank you for the motivating story. Your positive attitudes shine through in this story. Readers, be sure to learn more from the over at Debt Ascent and follow along on their financial independence journey.
Also, if you’re not pursuing a loan forgiveness program like PSLF, be sure to look into refinancing your student loans. You could save tens of thousands of dollars in interest over the life of those loans. See the latest rates and cashback offers.]
Has student loan debt been a major chapter in your personal financial journey? Were you able to use it as motivation? Share your story in the comments below!